Vancouver — Kinross Gold (K-T, KGC-N) is stepping up the pace of consolidation in the North American gold mining industry, launching a friendly $3.5-billion bid to acquire Bema Gold (BGO-T, BGO-N, BAU-L) — a move that analysts say could still draw competing offers.
The all-stock transaction appears to be driven by the bigger-is-better mantra as well as the prospect of future production from Bema’s $425-million Kupol gold project in Russia, which is headed for startup in mid-2008.
The two companies are already familiar with each other, through their joint ownership of the Refugio gold mine in northern Chile.
As part of the deal, Clive Johnson, Bema’s president, CEO and chairman, will head a new exploration company that will acquire $20 million worth of assets from Bema. Kinross will have the right to acquire a 10% stake, while retaining the option to double its interest if the company is taken public. The exploration company’s assets will include Petrex (Proprietary), which has properties in South Africa, an exploration joint venture in northern Colombia with AngloGold Ashanti (AU-N) plus an exploration alliance in Russia’s far northeastern Chukotka Region.
In conference calls with financial analysts, Kinross president and CEO Tye Burt described the Bema deal as a “win-win” situation that dramatically raises his Toronto company’s gold resources to over 50 million oz. — up 38% from 2005.
“We will have a well-balanced gold reserve profile,” he said, with 39% in Chile, 37% in Brazil, 16% in North America and 8% in Russia.
Johnson echoed that view, saying he is attracted by the growth potential of the combined company.
“We look forward to discussing this opportunity with our shareholders, which we think is good value,” he said.
Kinross currently ranks as the world’s eighth-largest gold producer. Output from Kupol is expected to push the combined company’s annual gold production to 2.8 million oz. in 2009, up from 1.8 million this year.
The deal has already been approved by the boards of both companies and will be completed through a plan of arrangement that will see each Bema share exchanged for 0.441 of a Kinross share.
Kinross says the offer values Bema at $6.61 a share, a 34% premium to the stock’s average price in the 20 trading days before the deal was announced. Shares of Kinross fell $1.46 to $13.53 on the Toronto Stock Exchange on the day the deal was announced, while Bema shares rose 49 to $5.27.
Given that Barrick Gold (ABX-T, ABX-N) swallowed Placer Dome last year and Goldcorp (G-T, GG-N) has just completed its buyout of Glamis Gold (GLG-T, GLG-N), analysts say the offer comes as no surprise.
“This is a deal that makes a lot of sense for both companies, and one we thought was likely,” says Richard Gray of Blackmont Capital in Toronto.
The pricing of the offer implies that Kinross is paying 1.32 times Gray’s estimated net asset value of US$4.40 for Bema, meaning the deal will likely be accretive to Kinross’s net asset value, he says. Gray believes a competing offer is possible given the attractiveness of Kupol and the size of Bema’s Cerro Casale gold-copper deposit in northern Chile.
But other analysts aren’t so sure.
“I’d be surprised if another player comes forward,” says John Ing, president of Maison Placements Canada in Toronto.
In order to close, the deal must clear a number of regulatory hurdles, including the approval of at least two-thirds of the votes cast by Bema shareholders at a meeting to be held in January.
Upon completion, 61% of the combined company will be held by the existing shareholders of Kinross and 39% by existing Bema shareholders.
Bema has agreed to pay a break fee of $79 million under certain circumstances and Kinross has the right to match competing offers.
Arizona Star Resource’s (AZS-V, AZS-X) 51% interest in Cerro Casale has ignited interest in the company, with news of the merger sending the stock up $1.22 to $13.71 on the TSX Venture Exchange.